Covidien Beats on Q3 Earnings but Revenues Miss

Zacks

Covidien plc (COV) posted a 14.3% rise in fiscal 2014-third quarter adjusted earnings per share to $1.04 from 91 cents a year ago, beating the Zacks Consensus Estimate by 4 cents. Net earnings rose 11.0% to $474 million from $427 million.

However, reported earnings per share fell 21.2% to 67 cents from 85 cents in the fiscal 2013-quarter while reported net earnings dipped 23.5% to $306 million from $400 million a year ago.   

Total revenues in the quarter grew 4.3% to $2,688 million, marginally missing the Zacks Consensus Estimate of $2,690 million. On a geographic basis, revenues in the U.S. market increased 3.2% to $1,325 million. On the other hand, revenues from non-U.S. developed markets rose 4.2% to $948 million and from emerging markets went up 8.1% to $415 million.

Expenses and Margins

On an adjusted basis, gross profits inched up 4.2% to $1,598 million, while gross margin slid 100 basis points (bps) to 59.4% in the quarter.

Adjusted selling, general and administrative expenses, as a percent of sales, fell 130 bps in the quarter due to productivity improvements, partially offset by higher expenses resulting from acquisitions and spending on growth initiatives.

Research and Development (R&D) expenses escalated 6.2% to $137 million, or 5.1% of sales, in the quarter from $129 million, or 5.0% of sales, in the year-ago quarter.

Adjusted operating earnings upped 9.9% to $609 million. Adjusted operating margin rose 120 bps to 22.7% in the quarter.

Segment Results

Revenues from Medical Devices segment rose 5.2% to $2,302 million (accounting for 85.6% of total revenues) from $2,189 million in the year-ago quarter. However, revenues from U.S. Medical Supplies segment went down nearly 1.0% to $386 million (accounting for 14.4% of total revenues) from $389 million in the fiscal 2013-third quarter.

Product Group Results

Revenues from the Surgical Solutions rose 7.6% (up 1% in constant currency) to $1,305 million in the quarter, mainly driven by a 12.8% rise in Advanced Surgical sales. Operational sales rose 7%, as foreign exchange rate movement boosted the quarterly sales growth by one percentage point.

Advanced Surgical sales were largely boosted by the acquisition of Given Imaging. Further, Covidien’s BÂRRX gastrointestinal sales grew more than 20%, as did the company’s interventional lung business sales. These apart, vessel sealing and synthetic mesh both recorded double-digit rise in sales during the quarter.

In General Surgical, operational sales declined 3.0% due to sale of the Confluent biosurgery product line in January 2014, partially offset by the impact of the New Wave Surgical acquisition.

Revenues from Vascular Therapies were flat at $417 million driven by flat Peripheral Vascular and Neurovascular sales. Sales were flat in Peripheral Vascular business because increases in sales of chronic venous insufficiency and procedural support products were offset by decreases in sales of compression and dialysis products and by the impact of the company’s exit from the renal denervation market. Neurovascular sales were flat, as sales growth of flow diversion products were offset by lower sales of access delivery products.

Revenues from the Respiratory and Patient Care rose 1.9% to $966 million in the quarter. Patient Monitoring sales grew 6% in the quarter driven by higher sales of capnography products, which continued to grow above 30%. Airway & Ventilation sales grew slightly during the quarter driven by higher sales of ventilators. Patient Care sales increased due to higher sales of SharpSafety products, primarily resulting from the continued impact of favorable pricing and a competitive shortage of pre-filled syringes. Nursing Care sales fell marginally, mainly due to lower sales of enteral feeding products.

Zacks Rank

In early June, medical technology giant, Medtronic Inc. (MDT) announced its plans to acquire Covidien for $42.9 billion. Medtronic’s rationale behind the merger is to offset the impact of high U.S. corporate tax rate by shifting its tax base overseas, to Ireland. Subject to certain customary conditions, the acquisition is expected to close in the fourth quarter of 2014 or early 2015.

Post-merger, the combined entity will be known as Medtronic plc and will boast a comprehensive product portfolio, a diversified growth profile and broad geographic reach. On successful completion of the transaction, Medtronic plc is expected to report at least $850 million of annual pre-tax cost synergies by the end of fiscal 2018.
 
Covidien currently carries a Zacks Rank #4 (Sell). Some better-ranked stocks in the medical products industry include Alere Inc. (ALR) and St. Jude Medical Inc. (STJ), both with a Zacks Rank #2 (Buy).

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